NEW DELHI: With the Finance Ministry completing its draft Microfinance Institutions (Development and Regulation) Bill, another large piece of the puzzle on how to regulate Microfinance Institutions has fallen into place.

It has been a tough puzzle to crack. In the beginning of last year, when complaints about women being pushed into debt traps were gathering pace, the RBI and the FinMin were flummoxed by the diverse array of microfinance providers - NBFC-MFIs, co-operatives, non-profits, trusts - all answering to different regulations. The business itself, built around multiple, small transactions in farflung areas, made it hard to verify claims about collection methods and interest rates.

Today, looking at the draft Bill, it is evident that the FinMin has managed to find a way out of some of these perplexities. The Bill defines microfinance services broadly - financial services in small amounts including microcredit, collection of thrift, remittances, pensions, insurance and so on - and brings all organisations - except cooperatives only accepting deposits from their members - under the purview of one regulator (the RBI).

This is a marked contrast from the previous iteration of the Microfinance Bill - which was tabled in Parliament in 2007 but lapsed without becoming an Act. It supervised only those institutions that accepted deposits from microfinance clients (trusts, charitable societies, non-profits, etc). Not NBFC-MFIs which account for the bulk of microfinance disbursals in this country.

Further, unlike the Malegam committee, which advocated a minimum net worth of 15 crore for any MFI, the draft Bill pegs the minimum net worth at just 5 lakh. A change that smaller microfinance companies will welcome because, had the Malegam committee's recommendation been accepted, to be eligible as MFIs, only microfinance providers with a loan portfolio of 100 crore would have been regarded as MFIs.

Instead, the bill proposes that smaller MFIs, once they swell to a stipulated size in terms of clients and microcredit disbursals, be regarded as systemically important microfinance instutions and be subjected to more stringent scrutiny.

In that sense, says Kishore Puli, the founder of Trident Microfin, a medium MFI headquartered in Hyderabad, "The draft Bill gives a lot of clarity to new entrants."

In the early days of drafting the Bill, says CS Reddy, the CEO of Andhra Pradesh Mahila Abhivruddhi Society, an organisation that works with SHGs, the industry wanted an independent regulator for the sector, tentatively named the Microfinance Development and Regulatory Authority. Going by the bill, this suggestion has not found favour amongst other constituents of the drafting committee.

Instead, two advisory councils are being created. The first, the Microfinance Development Council, will advise the government on policies and other measures required for "the orderly growth and development" of the microfinance sector. Apart from these, the bill recommends State Advisory Councils be set up. These will monitor, among other things, field level conduct of the MFIs and bring those to the attention of the central government.

That is the first of two axis along which clients will be protected. All MFIs, large or small, have to register with the RBI before they can function. And if it feels the MFI's actions are hurting clients, it can issue cease and desist orders.

On the whole, the industry has responded with relief. Says Vijay Mahajan, the founder of Basix, "The Bill acheives the golden mean between affordability for the borrowers and sustainability for the providers. If this had come about in 2006, there would have been no malpractices of the kind we have seen in the sector."

However, questions remain as well. The RBI gets sweeping powers to determine everything from formulating policy to determining the number of clients an MFI can have. Not to mention monitoring the financial reports the MFIs will have to submit. It's not clear if it can handle this volume of work. Then, there is little role for the state governments. The state advisory councils relay their comments to the centre. This is a problem as well. States will want to crack down if there is any emerging law and order problem. A pressure that was further exacerbated, in Andhra, by pressure from political rivals upon the state government to act.

There are other issues. Like the poor representation of borrowers in either of the councils. As for the AP Microfinance Law, while the draft Bill says that Microfinance is not moneylending, the state government insists it is. It is a complex question of jurisdiction. As NBFCs, MFIs are regulated by the RBI. As financial corporations, as per the Seventh Schedule of the Constitution, they come under the centre. But see them as moneylenders and the seventh schedule makes them a state subject.

An answer on this will have to come from the Supreme Court.

Anyway, these are early days. The comments are active. Now to see what the Bill as presented in Parliament looks like.